That's Entertainment

04/21/2006 12:00 am EST

Focus:

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

For those looking for more than just some stock ideas - but rather seeking a real education on the fundamentals of investing and stock selection - I urge you to attend a workshop by Nancy Zambell. Here’s one of her latest ideas, a play on home entertainment.

"Home entertainment - whether it's music, reading, videos or television - is on the upswing. As Americans continue to relax and embrace these medias in their leisure time, this industry will keep growing by leaps and bounds. The media gives plenty of coverage to the major entertainment companies, including movie complexes, newspapers, video rentals, theme parks and motion picture studios.

"But we often don't hear about those businesses that quietly stay in the background yet are essential to keep the wheels of the entertainment industry turning. One such company is Source Interlink Companies (SORC NASDAQ), a quickly expanding business that services retailers, publishers and providers of home entertainment content. The firm helps its retail, magazine and home entertainment customers efficiently manage their supply chains.

"In its magazine fulfillment segment, it sells and distributes domestic and foreign magazine titles to specialty retailers and wholesalers. Source Interlink also provides return processsing services for retail book chains and operates as an outsourced fulfillment agent. In its CD and DVD fulfillment sector, Source Interlink sells and distributes prerecorded music, videos, video games and related products to retailers.

"Additionally, the company offers its customers consumer-direct fulfillment and vendor-managed inventory services. Its in-store services segment designs, manufactures, installs and removes front-end fixtures and provides rebate-related claim filing services from customer's, publishers and agents.

"Although the nature of the business isn't as exciting as making movies and videos, Source Interlink provides the necessary behind-the-scenes services that are so crucial to its customers. And this segment is gaining steam. The company announced last month that it made a $13 million cash purchase of magazine and book distribution operations in two US regions from Anderson News Co.

"Source Interlink has also just hired Deutsche Bank as its financial advisor to help the company evaluate a possible sale, recapitalization or additional acquisitions. Meanwhile, the stock is trading at a price-to-earnings ratio of just 27.6, 12 percent less than its competitors. Yet its sales are growing at a rate that's 10 times that of its peers.

"In my opinion, the stock is a great find, with just a handful of analysts covering the company. That won't last for long. Institutions have recently purchased 1.2 million shares, an increase of 6.8 percent in the last few months. Buy Source Interlink at a price no greater than 11.50 per share, and set a stop loss of 20% less than your purchase price. Our target price is 16."

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